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Eq. (8) is equivalent to

Eq. (8) is equivalent to Eq. (15). Hence, landlord maintenance in landlord-owned housing is equal to that in owner-owned housing; i.e., mO(u) = mL(u) for all u. This is because the landlord derives the benefit of his or her maintenance from the rent increase in period 2. As mentioned in section 2.1.3, this implies that property rights are protected when there is no tenancy rent control. Comparing Eq. (15) and Eq. (24) reveals that mL(u) > mS L (u, α) for all u, given α > 1 and ˜γ2m > 0. This implies that the marginal profit of m is reduced by tenure security. This result is consistent with Kanemoto (1990) and Seshimo (2003). Thus, we obtain the following proposition. Proposition 2 (i) In case I, uO < uL < u S L and mO = mL > m S L . In case S, uO < uL < u S L and mO > mL > mS L . Thus, we have q2(uO, mO) > q2(uL, mL) > q2(u S L, m S L) (26) in these cases. (ii) In case C, uO < uL, uO ⋚ u S T , uT ⋚ u S T , mO < mL, mO ⋚ m S L , mL ⋚ m S L . Thus, the ranking of quality is ambiguous in case C. The Nash equilibrium of landlord-owned housing without tenure security in all cases is located on mO(u) above uO; e.g., EL in Figs. 1–3. In case S, the landlord’s under-investment results from over-utilization by the tenant. Thus, double moral hazard occurs in case S. On the other hand, in case C, the tenant’s over-utilization induces over-investment by the landlord. Proposition 2(i) also implies that the levels of over-utilization and under-investment due to the rental externality increase, largely because of tenure security in both cases I and S. Figures 1 and 2 compare the Nash equilibrium with tenure security (ES L ) and without it (EL) in cases I and S, respectively. The Nash equilibrium moves in the gray area above uL, e.g., ES L , when tenure rights are strengthened and property rights are weakened by tenancy rent control. Therefore, tenure security accelerates the deterioration of rental-housing quality induced initially by the effect of the the rental externality in both cases I and S. In case C, however, the equilibrium with tenure security is in the gray area. Thus, the effect of tenure security on housing quality is ambiguous in case C. 16

5 Empirical Analysis 5.1 The Data and the Empirical Model Let us summarize the previous section. Equation (25) implies that the total effect reduces the quality of tenant-owned housing compared with that of owner-owned housing in both cases I and S (q2(uO, mO) > q2(u S T , mS T )).18 However, the ranking of the quality of tenant- owned housing with and without tenure security is ambiguous in these cases (q2(uT , mT ) ⋚ q2(uS T , mS T )). Equation (26) shows that the quality of landlord-owned housing deteriorates relative to that of owner-owned housing according to the total effect in both cases I and S (q2(uO, mO) > q2(u S L , mS L )).19 In addition, this equation predicts that tenure security accel- erates the deterioration of landlord-owned housing in these cases (q2(uL, mL) > q2(u S L , mS L )). However, in case C, it is possible for the quality of tenant-owned (landlord-owned) housing to exceed that of owner-owned housing. Therefore, the model demonstrates that the impact of the rental externality and tenure security on housing quality is an empirical question. Thus, in this section, we investigate the empirical evidence on this issue. We use the 1998 Housing Demand Survey of Japan (the JHDS) conducted by the Min- istry of Land, Infrastructure and Transport. In practice, we cannot directly estimate q2(u, m) because q2 is unobservable. However, the JHDS provides information on the degree of dilap- idation in the following three categories: repairs not needed, or slight repairs needed; major repairs needed; and dilapidated beyond repair. As do Gyourko and Linneman (1990), we refer to housing needing no or slight repairs as sound. Housing needing major repairs and dilapi- dated housing are referred to as not sound. Table 1 shows the percentage of sound housing in the sample. By defining a dummy variable for ‘sound’, we can estimate the following probit specification: 18 The data used in this paper is from the 1998 Housing Demand Survey of Japan. In 1992, a fixed-term land lease system was introduced. However, we do not include cases of tenant-owned housing with fixed-term contracts in the sample. The first reason for this is the lack of observations (there are only 102). The second reason is more serious. There are two types of fixed-term contract. One has perfect property rights, in which the landowner must purchase the housing on the rented site (λ � 1). The other type has no property rights, so no request can be made to the landowner to purchase the asset on the rented site (λ = ∞). However, one cannot separate these samples into two groups. Therefore, in our sample, all tenant-owned housing is controlled by tenancy rent control. Hence, it is difficult to determine the influence of the rental externality (q2(uO, mO) > q2(uL, mL)) independently. 19 The fixed-term housing lease system had not been introduced by 1998. 17